A Guide To Detecting Employee Fraud And Ways To Prevent Employee Theft

Industry specific

Employee fraud, also known as employee theft, is an unfortunate reality for all businesses, regardless of the size of the company. In fact, approximately 95% of U.S. businesses are affected by employee theft, according to the California Restaurant Association.

Other employee fraud statistics also show that employees steal around $50 million from U.S. businesses annually (Stealth Labs) and that in 3 out of 10 employee fraud cases, the offender has been stealing for years (CompareCamp).

Now, while the statistics do present a grim picture, there are plenty of ways to prevent employee fraud. The first step to do so is by detecting employee theft.

What Is Employee Fraud

Employee fraud or employee theft refers to cases where a worker conducts fraudulent activity in order to make gains. In many cases, these gains appear in the form of discounts, hidden compensation, and other benefits.

In extreme cases, employee theft can put the company in a bad light, which may also eventually lead to business failure. This is why getting certified fraud examiners involved is also extremely important, especially for small businesses which are more susceptible to fraud.

There are more than a dozen types of fraud, each of which falls under the five main categories of employee fraud, namely Asset Misappropriation, Vendor Fraud, Accounting Fraud, Payroll Fraud and Data Theft.

How To Detect Fraud In The Workplace

Oftentimes, small business owners and big companies will see several red flags of ongoing employee fraud. Here are several:

Working long hours

An employee who comes in early, stays late, works on weekends, and rarely takes sick or annual leaves is one of the classic red flags for employee fraud.

Similarly, experts say employees who come in early and work late or on weekends may be taking advantage of hours to conduct fraudulent activity without the fear of getting caught.

Unusual Circumstances

Not all unusual patterns that emerge point to employee theft. However, when there are unusual circumstances, it could be worth a closer look.

Here are certain behaviors to pay attention to:

  • An employee frequently works outside of business hours
  • An employee refuses to share certain tasks with colleagues
  • An employee is reluctant to have someone review their work
  • An employee will only work with a certain supplier
  • An employee refuses to follow proper procedures

A Change in Lifestyle

If someone earning a modest salary suddenly starts wearing an expensive watch or a luxury handbag, it may be a cause for concern. This red flag may seem the most obvious clue to employee theft. However, it is also the one sign that companies often miss.

When you observe these signs in an employee, it is important not to accuse them outright. Before throwing any accusation, it is crucial to first take the time to assess if there are legitimate circumstances that can explain the big purchases, such as winnings, inheritance, or saved funds.

Showing Signs of Stress At Work

There are lots of reasons why employees may show signs of stress. However, workers who suddenly display anger or anxiety in response to routine questions about their duties could be warning signs. These types of employee behavior are even more seen when it is an auditor asks questions.

Working In A Position To Commit Fraud

It is often that the employees who have been working at the business for a long period are most likely to commit fraud. This is because more veteran employees have the company’s trust and are already knowledgeable of the company’s weaknesses. As such, they most likely also have the ability to override what appears on paper.

In addition to veteran workers, employees who have trusted roles in finance and purchasing may also be more likely to commit fraud as they have access to company assets.

Close Relations Within The Business

Employees who have a close relationship with vendors may open the doors to the supplier overcharging the company. Employees who form an overly close relationship with a group of people who have access to company assets may be involved in fraud.

Inconsistencies In Accounts Receivable

When there are excessive or unexplained cash transactions, unreconciled bank statements, or an unusual increase in reimbursements, your company may be a victim of fraud.

Receiving Tips

According to a 2018 Report To The Nations by the ACFE, 40% of occupational fraud cases were detected after receiving a tip from whistleblowers. As such, it is worth taking all whistleblower tips seriously even if they are submitted through the company’s anonymous reporting system.

Why Does Employee Fraud Happen

According to the National Association of Certified Valuators and Analysts, there are four common factors that create the ideal events for fraudulent activities.

  • If the company has inadequate or ineffective internal controls. This is often seen in small businesses as they have fewer controls to prevent fraud or handle employee theft.
  • Employees committing fraud would invent justifications to rationalize their crimes
  • Employees suffering from external threats or pressures, such as personal debt or credit problems
  • To pull off a fraud scheme, the employee should have patience and access to sensitive information

How To Deter Theft In The Workplace

As mentioned above, employee fraud can happen to any business and may lead to the failure or closure of the company if kept unchecked.

There are a number of things you can do to prevent employee fraud, including:

  1. Building a culture of ownership

When you create an employee equity scheme, you are giving your teams the power to build their own roadmaps and goals for the company. This makes employees feel heard and valued, which in turn fosters their trust in the company.

  1. Consider automating processes

When you use digital tools to automate manual processes, you are not only saving time and effort, but you are also reducing the risk of human errors.

  1. Choose tools that promote transparency

When you hand out shared credit cards, it makes it harder for your team to find out who spent what and how much. Moving away from shared tools and processes helps increase visibility, giving you access to real-time data and information on where company funds went.

  1. Practice proper bookkeeping

In line with what is stated in #3, practicing good bookkeeping deters employee theft by administrative staff. To do this, ensure that no single person is responsible for too many parts of the company’s financial transactions. You can consider getting a senior employee to review and sign off on all tasks related to your company’s finances.

In addition, it is also important to perform bank reconciliations and reviews of financial transactions each month.

If possible, hire a qualified accountant to ensure that any transactions using business funds are properly posted and that an audit trail does not show suspicious activity.

  1. Track inventory

It is important to monitor your inventory daily, especially if you are selling high-priced items and luxury goods. If you find a sudden increase in damaged goods or a drop in sales, it may be a sign of fraudulent activity.

  1. Count the cash

If your business is moving cash, it is crucial to put in place a process where at least two people are verifying the amount involved.

Ideally, you or a senior employee should also count the cash at the beginning and the end of each day.

  1. Be active

Small business owners who actively participate in their business and who work alongside their staff are more likely to notice any signs of fraud. Employees are also less likely to commit any fraudulent activity in the presence of business owners.

  1. Offer perks to boost morale

When you offer perks, such as exclusive discounts or a free meal per shift, you are deterring employees from conducting theft, decreasing staff tardiness, and boosting worker morale.

  1. Consider a stricter hiring process

When hiring, it is advised to use screening tools, especially for positions involving cash handling and bookkeeping. These may include performing background checks and credit checks on candidates as well as verifying prior employment.